Mining Stock Talk: Puru, you’re October 8th, 2009 dispatch called to the day the beginning of the strong upleg we saw on the gold price which extended into December, creating a new all-time high. How did you make that call?
Puru Saxena: Back then, gold had just broken out of a multi-month consolidation pattern and this breakout prompted us to issue a bullish call.
MST: Where would you say we are now in terms of the Gold price? Silver?
PS: We continue to believe that precious metals are in a bull-market; conversely, paper money is in a bear-market versus hard assets. The ongoing monetary inflation and currency debasement is responsible for this bear-market in paper money. We don’t have a stong short-term view on gold and silver but we expect higher prices over the next 4-5 years. It is conceivable that gold could double over that time frame and silver should rise even more.
MST: Many are calling for a severe correction in the Dow Jones Puru. What are your thoughts on equity markets at this time?
PS: We believe that equities are in a secular bull-market and the next big correction is not likely to unfold for another 2 years or so. In our view, the March 2009 low marked the nominal low for the entire secular bear-market (which commenced in 2000) and henceforth, prices are likely to drift higher.
MST: Do you still believe we are in a secular bull market for stocks? How long might this secular bull last if this is the case, and how high can it go? Why?
PS:Yes, stocks are still in secular bull-market. We favour the developing stock markets in Asia over the debt-plagued West but most of the markets should head higher for the next 2-3 years. In any event, we expect leadership from the fast growing economies in Asia (China, India and Vietnam).
In the US, if 666 on the S&P turns out to be the nominal low for the last bear-market, then the current secular bull-market can go on for several years. And it will most certainly take most stock indices to record highs. This is the nature of bull-markets; prices tend to go higher than most rational people expect. Now, if you look at the 20th century, the US stock market had three secular bear-markets (1906-1920, 1929-1932 and 1968-1982). After these bear-markets ended, stocks continued to rally for several years and they clocked in very impressive returns. Now, the most recent secular bear-market started in March 2000 and it probably ended in March 2009. If this hypothesis is correct, then based on previous bull-markets, stocks could rally for many years.
When it comes to investing, it is worth remembering that stocks represent partial stakes in operating companies. As long as the underlying businesses are performing well, over the medium to long-term, their stock prices will reflect this reality. Today, some industries in the West are struggling, but we would argue that plenty of companies in the West (especially, the multi-nationals) continue to grow their businesses. Corporate earnings are on the rise and with the tonic of inflation, we expect nominal earnings to appreciate over the medium to long-term. Over the medium to long-term, this will cause stock prices to rise in nominal terms.
MST: What do you see coming down the road for mining equities? Do you feel there could be a coming “mania” price explosion in precious metals/equities?
PS: If the governments continue to print money and there is a currency crisis, precious metals should appreciate in terms of paper money. And the well-established gold and silver producers should benefit immensely. We have some exposure to precious metals mining stocks. Now, if inflation becomes obvious and investors become nervous, we may well get a ‘mania’ in precious metals.
As far as base metals are concerned, we are not very bullish. If you review the supply and demand data, you will note that the inventory levels on the London Metals Exchange have been steadily building up and the recent run-up in prices is not justified by the fundamentals. For sure, a rising monetary tide lifts all boats, so base metals could continue to rally, but we are concerned and have sold out of our positions in this area. In our view, precious metals and energy represent the best opportunities in the commodities complex.
MST: How do individual investors go through the maze of finding quality mining stocks?
PS: When it comes to mining stocks, essentially, you want to own dominant companies with reserves in geopolitically safe areas of the world. Remember, mining is a very risky business, so tend to favour well established, large-cap companies with diversied operations. Furthermore, for maximum ‘bang for your buck’, you want to own unhedged companies, so that they can benefit from the price appreciation of their product. Apart from all these qualities, we also look for rising production, increasing reserves and solid cash flow.
MST: In your April 7th editorial, in relation to south african gold miners you state, “at current prices, these companies are being given away.” Can you elaborate on this? How can individual investors participate? Can they do that with you? Can you name any names here on stocks, or is that for clients only?
PS:It is worth noting that South African gold miners are high cost producers. For instance, their all-in cost is roughly $900-950 per ounce. So, as long as gold was trading below that level, these companies were not profitable. However, with the price of gold now above $1,100 per ounce, these companies have swung to profit and this newly found profitability should attract investors. In our view, South African mining stocks are currently undervalued because of geo-political risk. Investors in the West are worried that the local government may nationalise the assets, but we don’t expect such a draconian outcome. Moreover, the South African Rand is likely to weaken against the US Dollar and this will really help these miners as the majority of their costs are denominated in the Rand. So, if the Rand depreciates over time, the South African gold companies will become even more profitable.
MST: Thanks Puru.
Tekoa Da Silva
Disclosure: Long Silver